Nvidia Stock Has a New $500 Billion Opportunity in the Artificial Intelligence (AI) Boom
Nvidia (NVDA +2.19%) has been a cornerstone of the artificial intelligence (AI) trade since OpenAI introduced ChatGPT in late 2022. Shares have advanced more than 1,300% since January 2023, and most Wall Street analysts still view the stock as undervalued.
Nvidia recently announced a strategic partnership with six of the world’s largest financial institutions to secure more than $500 billion in financing for potential customers. That capital will unlock demand by helping smaller enterprises and AI labs purchase Nvidia systems.
Here are the important details.
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Nvidia taps a new $500 billion opportunity with a novel financing platform
Nvidia recently partnered with six financial institutions — Apollo Global, BlackRock, Blackstone, Brookfield, Goldman Sachs, and KKR — to create new financing platforms designed to mobilize more than $500 billion in capital for artificial intelligence infrastructure. Nvidia itself may backstop up to $125 billion, or 25% of deals.
Nvidia hardware generally comes with a hefty price tag, which can make it prohibitively expensive for smaller enterprises and AI labs. These financing platforms aim to remove that obstacle by providing prospective customers with an alternative path to purchasing AI infrastructure. In doing so, they will extend Nvidia’s addressable market.
“We are helping create a new class of productive, investable infrastructure: AI factories,” CEO Jensen Huang commented in the press release. “These financing platforms will help customers access scarce compute at scale and build the AI factories that will power every industry and country in the age of AI.”
The market may be underestimating the useful life of Nvidia chips
Nvidia systems are the industry standard in artificial intelligence infrastructure. With a full-stack approach that spans integrated hardware and software, the company can optimize data centers for performance and power efficiency in ways that most competitors cannot.
Jensen Huang says Nvidia systems cost less per token, generate more revenue, and have longer lifespans than alternative solutions. Indeed, there is evidence that Nvidia systems are proving much more durable than the market initially assumed. Neocloud CoreWeave recently signed a contract to rent Nvidia A100 GPUs (introduced in 2020) through 2029.
Analyst Kyle Reidhead recently explained the situation during an interview with Schwab Network: “What we are realizing is that the GPUs are used first for training on frontier models for about two or three years, then you get another three years on inference, and another three, four, or five years on niche training and niche work for enterprises.”
So what? Michael Burry, best known for shorting subprime mortgages ahead of the financial crisis in 2008, currently has short positions in Nvidia and other AI companies. His rationale centers on this idea: The useful life for server equipment is about two to three years, but hyperscalers are depreciating the hardware over five years, which overstates the return on their investments in AI infrastructure.
However, recent commentary from CoreWeave suggests the useful life of Nvidia GPUs is much longer than five years, meaning hyperscalers may actually be understating the return on investment in AI infrastructure. And if the useful life of Nvidia chips is longer than previously anticipated by the market, it could strengthen the company’s pricing power, as customers would theoretically be willing to pay more for a longer-lived product.
Wall Street analysts think Nvidia stock is deeply undervalued
Looking ahead, Wall Street estimates Nvidia’s earnings will increase at 44% annually over the next three years. That makes the current valuation of 32 times earnings look downright cheap. Indeed, most Wall Street analysts believe the stock is undervalued.
As of Aug. 24, Nvidia has a median 12-month target price of $300 per share, according to The Wall Street Journal. That represents the consensus estimate among 67 analysts, and it implies 44% upside from the current share price of $208. Patient investors should consider buying a small position in Nvidia today.
